Tax offers Pakistan escape from poverty
By Tarique Niazi
Pakistanis were thrilled to hear United States Secretary of State Hillary
Clinton during her recent visit chiding the Asian country's business elite for
their tax-shy habits.
During her October 28-30 visit, she met business leaders in Lahore, capital of
the Punjab, Pakistan's most populous and most prosperous province, for plain
talk.
Addressing a conference in the Governor's House, where captains of industry
were assembled, she stunned her audience by setting aside diplomatic niceties
to hammer home a straight
and searing message:
At the risk of sounding undiplomatic, Pakistan has
to have internal investment in your public services and your business
opportunities ... The percentage of taxes on GDP [gross domestic product] is
among the lowest in the world ... We [the United States] tax everything that
moves and doesn't move, and that's not what we see in Pakistan ... You do have
180 million people. Your population is projected to be about 300 million. And I
don't know what you're gonna do with that kind of challenge, unless you start
planning right now.
Middle Pakistan cheered her candor and
echoed her concerns.
The US regards Pakistan's national security as inextricably linked to its
economic security. The US Congress's Enhanced Partnership with Pakistan Act
(EPPA) of 2009, which President Barack Obama signed into law on October 16,
attests to this new US vision of Pakistan.
The EPPA (otherwise known as the Kerry-Lugar Bill) will provide Pakistan with
US$7.5 billion in economic aid over the next five years. This is the
single-largest aid package the US has offered to any ally, although Pakistan
has long been one of the largest recipients of US aid, which puts it next only
to Egypt and Israel (listed alphabetically).
According to the US Congressional Research Service (CRS), Pakistan received $15
billion in US economic and military assistance in the 1947-2004 period.
Islamabad, however, has garnered far more indirect benefits from its
relationship with the United States, especially since the 9/11 terror attacks
there. A Pakistani lawmaker valued the indirect benefits at a remarkable $50
billion. Irfan Siddiqi, a conservative journalist who opposes the EPPA,
reported that $85 billion had flowed into Pakistan since 9/11.
A major illustration of these benefits is remittances by Pakistani expatriates,
which stood at close to $1 billion in 2001, and have now risen to $12 billion a
year.
Yet these benefits are vertical in growth, which hardly trickle down to the
average Pakistani. What makes this vertical accumulation even worse is its
immunity to taxation. As a result, it does little to help the government escape
from the trap of an enduring fiscal deficit - a gap between the government's
annual revenue and its expenditure - and increase what little it has to invest
in what Clinton calls "public services".
Pakistan has been financing the fiscal deficit with external and internal
borrowings. In 2008, the fiscal deficit climbed to almost $9 billion (722.5
billion rupees), which came to 5% of Pakistan's gross domestic product (GDP) of
$160 billion. The financing of this gap drains the government of every ounce of
its fiscal energy. The result is extensive cuts in its public expenditure, at a
time when governments around the world are stoking public spending to keep
afloat.
In 2008, the government budgeted 646 billion rupees (US$8 billion) for public
sector development (PSD), which includes spending on defense, economic
development, education, and healthcare. Public healthcare claimed a laughable
allocation of $79 million for a nation of 180 million people, that is 43 cents
per person per year.
The untaxed vertical growth, a severe fiscal deficit, and reduced public
expenditures are what fuels poverty in Pakistan. As of 2009, 40% of the
national population lives below the poverty line, which in Pakistan is
liberally defined as a food intake that is equivalent of the daily need of an
adult's caloric consumption. In other words, if a person secures the daily diet
of required calories, she/he is "unpoor;" if they fall short, they are "poor".
Even by this liberal definition, 72 million Pakistanis, according to the
Pakistan Planning Commission, still live below the poverty line. Some
independent observers, such as banker and economist Shahid Hasan Siddiqi,
believe that 50% of the national population (that is, 87 million Pakistanis) is
at risk of slipping below the poverty threshold. The Mahbubul Haq Development
Center counts 73% of the population living below the poverty line.
Many blame the regime of former president Pervez Musharraf for reducing the
definition of poverty to make it appear there were fewer people than there
actually were. Prior to October 2006, the Musharraf government reported 33.6%
of the population as poor; as of that month, it claimed the rate was down to
23%.
Poverty varies across Pakistan. The most deprived parts include rural areas,
followed by Balochistan and the Pakhtunkhwa, which border Afghanistan. Rural
Pakhtunkhwa is the worst hit by privation. The Federally Administered Tribal
Areas (FATAs), 97% of which are rural. are little better off. According to the
World Food Program, the entirety of the FATAs are food-insecure. Poverty among
3.3 million residents of the tribal areas is as high as 90%.
The Awami National Party, which leads the coalition government in the
Pakhtunkhwa, has worked out a long-term economic construction plan for the
seven tribal agencies, which will cost $12 billion. Pakistan, however, needs
$50 billion nationwide - $5 billion a year for 10 years - to make a meaningful
dent in the existing level of poverty.
To raise this kind of money, the country has to mobilize its own resources by
having taxable income-earners (individuals and companies) pay their fair share.
Yet Pakistan has been grossly undertaxed, largely thanks to military regimes -
of Ayub Khan, Zia ul-Haq and Musharraf.
These regimes did not rely on tax revenue to stay afloat. Instead, they traded
in their geopolitical utility to keep them in cash. They each, therefore, went
easy on the urban-industrial elite and large landholders in exchange for their
support in grabbing power. As a result, the tax-GDP ratio under these
governments, which Clinton lamented, hovered around 10%. The ratio increased to
14% in the 1990s, when democratically elected governments of the Pakistan
People's Party (PPP) and Pakistan Muslim League (PML) were at the helm.
The late prime minister, Benazir Bhutto, during her second term in office
(1993-1996), took the national housekeeping far more seriously. She went after
the "untouchables", such as the All Pakistan Textile Mills Association (APTMA),
to persuade them to open their checkbooks to the treasury. She would use chalk
and board, according to Mirza Ikhtiar Baig, an aide to Bhutto, to convince
naysayers among textile barons to contribute to the national till. Yet the
textile sector, which had a projected income of $11 billion in 2007-08, has
almost been tax-exempt. Many believe that textile tycoons constituted some of
the power behind Bhutto's ouster in 1996.
In general, those who form the top of the economic pyramid in Pakistan are
resistant to paying their fair share in taxes. Large landholders are especially
notorious in evading the taxman. In the 1990s, the government took on the
landowning classes and had legislation passed to tax their income, the first
time the taboo on taxing farm income was broken.
Although the legislation was toothless, it was symbolically potent. The
landowning classes, who ride on their landownership into the legislative
chambers, were thus cut down by their own power after for long taking
tax-exemption as their entitlement.
A case in point is Sardar Farooq Legari, whose estates extend from the Punjab
to the Pakhtunkhwa. In 1994-95, he reported "zero income" while he was still
the sitting president of Pakistan. Imran Khan, leader of the Pakistan
Tehrik-e-Insaf (Pakistan's Justice Movement) shamed the entire landed class by
revealing that a practicing lawyer, Khalid Ishaq, paid more in taxes in 1992-93
than all 273 members of the National Assembly combined - 85% of whom were large
landholders.
This shaming, however, did not work on lawmakers who kept evading taxes. In
1994-95, celebrated journalist-writer M Ziauddin conducted a thorough
investigation into the taxable farm income and tax-paying behavior of wealthy
farmers. He found that all landlords in the country pitched in just chump
change of 2 million rupees in taxes in 1996 against their annual income of 600
billion rupees. On this scale, Ziauddin concluded that the landowning classes
had been evading taxes of 100 billion rupees a year.
This is a blatant case of tax theft, which has spawned its own vicious
knock-offs, one of which is "black money" (that is, totally untaxed wealth). In
1996, an economist estimated that black money in Pakistan grew as large as to
form 40% of GDP. If left alone, tax evasion in the above-ground economy or
underground economy increases the budget deficit and forces governments to
shift the tax burden to consumers or to increase money supply.
In either case, it is a whammy for the poor. In the 2008-09 budget, Pakistan
has set itself on the course of widening the tax net. In terms of the tax-GDP
ratio, the current budget features a relatively high ratio at 14%. The tax base
also is on the rise. In 1994, it consisted of an overwhelming majority of the
working middle class of 800,000 tax payers, who have now grown to more than 2
million.
The government, thus, can over the next 10 years raise $50 billion - $5 billion
a year - to rein in poverty. At the current exchange rate, $5 billion comes to
345 billion rupees. Economist Shahid Hasan Siddiqi believes that Pakistan is
undertaxed by 400 billion rupees a year. Its tax revenue should be 1.6 trillion
rupees as against the projected 1.25 trillion rupees for 2008-09.
The government can close this gap by eliminating tax exemptions. It is unfair
for a country like Pakistan to give a two-year tax holiday on capital gains,
which, according to Siddiqi, costs the government 112 billion rupees a year.
Yet the stock market capitalization has more than doubled from 2,100 billion
rupees to 4,600 billion rupees within the past three years. This means that the
government's tax holiday is encouraging surplus wealth away from productive
enterprises to unproductive ventures such as the stock market.
Similarly, agriculture's contribution to GDP (of $160 billion) is 21%; but its
share in tax revenue is just 1%. At least an additional 100 billion rupees can
be raised by bringing farm income to tax. Siddiqi also lists the most
profitable industries such as textile, cement and sugar, which are near
tax-exempt or pay very little in taxes. They can be readily targeted for at
least another 100 billion rupees.
Similarly, the corporate sector is ridiculously undertaxed. The country's 768
top corporations posted taxable income as low as 8,300 rupees ($100 at the
current rate) a month; while 2,341 corporations claimed to be in the red.
Another 1,193 big companies reported 33,400 rupees a month in taxable income.
In parallel, the banking industry that has been swimming in profits - with
takings of 123.6 billion rupees in 2006 alone - yet have had their tax rate
reduced to 35% from 38%.
Economist Mahnaz Fatima decries the government for slashing the tax-GDP ratio
to 13.5% in 2006 from 17.2% in 1995. Siddiqi argues that a tax-GDP ratio of 15%
can raise the projected tax revenue of 1,250 billion rupees to 1,650 billion
rupees, yielding additional 400 billion rupees.
Last but not least, the government needs to widen its tax net to black money.
Although it has attempted to net the untaxed and black money in its 2008-09
budget, that is not nearly enough. To have a stolen pile in untaxed wealth
laundered white for 2% of giveaways in taxes will only invite public wrath.
Given the dire straits in which Pakistan finds itself, such wealth ideally
should be confiscated or mercilessly taxed up to 85%.
Any of the preceding measures, jointly or severally, can help the government
raise $50 billion over the next 10 years to combat the severity of poverty in
the country. Clinton's call for an increase in tax-GDP ratio to help Pakistan
meet its challenges ahead couldn't be more appropriate.
Tarique Niazi PhD is an environmental sociologist at the University of
Wisconsin-Eau Claire. He can be contacted at niazit@uwec.edu.
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